Money laundering and tax avoidance cost developing countries $1tr every year which must be harnessed to meet global development goals, Gerd Müller, the German Minister for Economic Cooperation and Development, said on Monday.
Muller called for greater transparency over the movement of money worldwide in order to tackle weakness in emerging market growth and sustainable development worldwide.
His comments come in the wake of the leak of the Panama Papers that thrust the use of high profile tax avoidance schemes into the public spotlight.
“We need a global finance register which will offer clear and consistent information for developing countries,” said Muller, speaking at the Asian Development Bank’s annual meeting in Frankfurt. “Emerging economies are losing $1tr to money laundering and tax avoidance every year.”
This figure far surpasses the $135bn that was given to the same nations in the form of rich country governments’ official development assistance in 2014, according to the OECD.
Global Financial Integrity, a not-for-profit organisation based in Washington DC, has estimated that the developing world lost $6.6tr as a result of illicit financial flows from 2003 to 2012.
According to critics, corporate tax avoidance poses a substantial risk to developing economies. Oxfam estimates the companies’ unpaid tax liability in developing countries is $104bn per year. Corporate tax revenues constitute a significant share of the national income of many developing nations.
Tax in developing countries is difficult to mobilise for several factors, one of which is the informality of employment in both rural and urban areas. A large informal sector makes broad-based taxation near impossible. Corruption, administrative constraints, and the lowering of tax rates to attract foreign investment also add to the difficulty of raising funds.
TAX GAP
Further revision of tax regimes in developing economies may also assist governments’ pursuit of sustainable development, according to a report last year by the European Parliament’s Committee on Development.
It highlighted that in low income countries the ratio of tax to GDP is just 10%-20%. In many countries it is less than 15%, which is generally considered the threshold below which governments find it hard to finance their basic functioning and services, the report said. For OECD economies, the ratio is much higher, at 30%-40%
“It is therefore essential to ensure that domestic tax collection becomes more predictable, stable and robust, and that all parts of society — individuals and companies — pay according to their means,” the report said.
Oxfam estimates that in 52 developing countries, an additional $269bn could be mobilised to finance public services if tax collection were significantly improved.
Muller said that development banks must tighten their lending guidelines to include not just how money is lent and how much, but also how much money is leaching out of the country unnoticed.
He added that the German finance ministry was committed to providing advice and support for all developing nations with regards to tax questions.
Muller also called for development efforts to be stepped up and identified three key pillars for fundraising — public funding, private investment and fair trade.
“There’s enough capital in the world for hunger to be wiped out,” he said. “Pension funds, sovereign wealth funds and insurance companies manage $93tr which is more than global GDP. We need incentives for private capital to be mobilised for sustainable development.”